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Wednesday, June 1, 2011

In this age of global uncertainty in the area of food producing and wealth preservation, productive farmland around the world has been placed into the spotlight by "guru investors," wealth management funds, growing mega agri-industries, wealthy individuals, and especially, food insecure nations.

If ownership of the farmland of a nation doesn't define a nation, then what does, I ask? Why are the deals popular? The same reason any deal is popular. There is strong demand and there are willing suppliers. Opportunism, if you will.

Sovereign wealth funds hold about $4 trillion in assets globally, and many, are food challenged, such as Saudi Arabia, United Arab Emirates, Abu Dhabi, Qatar, South Korea, and China. They are actively seeking out foreign farmland. China is by far the largest investor, buying or leasing twice as much as anyone else.

Indeed, the subject of foreign ownership of farmland is so common today that it is difficult to keep up. A lack of transparency in many of the land deals makes it impossible to make very accurate assessments.

How much foreign farmland has been acquired in recent years?

It is estimated that the amount of global farmland that has been acquired by foreign entities equals about 198 million acres. There is $100 billion waiting to be invested by 120 investment groups. Food insecure nations such as the Gulf States, China, Japan, South Korea and Western Europe are all interested in increasing their farmland holdings.

The Economist(80m hectares is more than the area of farmland of Britain, France, Germany and Italy combined.)

What are the benefits for those who sell out?

Let's use the Canadian farmer as an example. Canada does not regulate foreign ownership of farmland, its provinces do. In Canada, an average farm debt burden of 23 dollars per dollar of net farm income entices farmers to sell the land in exchange for farming it and having an outside business pay for expensive inputs in return for some form of crop sharing.

Some poor nations see opportunities to benefit from infrastructure building of rail, roads and ports. Often, however, high levels of corruption are involved in the land deals with low levels of benefit. There is frequently a lack of follow-through.

How much investment is from the private investment sector?

According to Reuters, the amount of private capital in agricultural farmland worldwide is expected to more than double to around $5-$7 billion in the next couple of years from an estimated $2.5-$3 billion invested in the last couple of years. U.S.-based agriculture consultants HighQuest Partners estimates that the total value of investment funds in agriculture lands worldwide is $15-$20 billion.

The larger buyer categories are sovereign wealth funds and agri-businesses. Mega farms being developed in central and eastern Europe, for example, now equal the size of Denmark.

What ecological harm comes from foreign ownership of a nation's farmland?

Local farmland ownership promotes sustainable practices over corporate large-scale production practices, preserves local food systems and family farms, and helps to ensure food security for the locality as well as for the nation.

What are the political risks?

Any nation faced with civil disobedience or unrest, for whatever reason, might be subject to regime changes which might quickly change foreign land ownership policy. Argentina has recently threatened to reverse honoring foreign land holdings. This quickly becomes what wars are made of, should the right conditions exist.

Citizens unhappy with foreign ownership of farmland could result in toppled governments.

Every nation is (or will be) considering its policy regulating foreign ownership of farmland. Many with loose standards will be tightening them. Brazil and Argentina are limiting the size of land foreign enterprises can own. Brazil would like to see partnerships instead of land transfers.

Investors in Africa’s agriculture sector need to understand that land ownership there is complex, fraught with politcal, emotive, and survival issues.

Other political risks would include farm policy regulation changes including biofuels policies, chemical use, GMO use, land set-aside policies, and land practice management.

Over time, there is a poor history of successful attempts to farm across borders.

Is it true that there is no more farmland in the world to come into production?

There are large areas in Latin America, Africa, the Ukraine, and Eastern Europe which could come into production. In addition, the developing nations have the potential and desire to increase their own agricultural commodity production through efficiency gains.

What are the economic risks?

Contrary to prevailing wisdom, there is no guarantee that corporate farming or farming for investors will pay.

One risk affecting profit potential is that of increasing global competition. Latin America, BRIC, and other nations are setting up reciprocal trade agreements and increasing output through increased efficiency.

Farmers in the U.S., Canada, the E.U., and Japan all rely upon farm price supports while individual farmers have relied upon off-farm income to survive. Future farm policies will be affected by debt burdens in developed nations.

What are a few examples of global farmland deals?

The Saudi Kingdom is behind a seven year project of acquiring 1.7 million irrigated rice acres in Senegal and Mali, enough to produce 7 million tonnes of rice. Proposals would allow Saudi business groups to take control of 70% of the rice-growing area of Senegal. Saudi Arabia has farming interests in Egypt, Ethiopia, Tanzania, Syria, Turkey and the Ukraine.

South Koreans want to produce rice, corn, sugar, fish, and livestock in the Philippines.

Japan is believed to hold three times the amount of its own farmable land outside of its borders.

Argentina and Brazil have acquired land in Uruguay.

The Qatari government has leased large amounts of land in Kenya. They also have or are working on deals in Brazil, Argentina, Australia, Sudan, and the Ukraine.

Egypt leases land in Uganda to produce rice, wheat and beef.

Foreign firms have invested in dairies, meat processing, crops and others areas in Serbia and other non-European Union members of the Balkans.

The World Bank says that the 463 projects covering 116 million acres, mostly in sub-Saharan Africa were acquired in eight months during 2008-9.

Some of Australia's biggest companies in the food business have been taken over by foreign companies in recent years. Australia allows 99-year land leasing.

Nigeria is appealing to the Gulf nations to utilize its land. It has 175 million acres and is only farming half of that. It desires investment in that land, it desires employment opportunities, and it claims that it could provide 100% of the Gulf's food needs.

Chinese investment in Kazakhstan reached $5 billion by the end of last year, slightly less than 4 percent of the country's total foreign direct investment. They are buying land in Brazil for soybean cultivation, as part of a $3.4 billion plan to build oilseed and rice production bases overseas including bases for rapeseed in Canada and Australia, palm oil in Malaysia and rice in Cambodia.

ConclusionAs an investment idea, it is altogether possible that acquiring foreign farmland is a fad, and when balance sheets disappoint, exits will be taken, returning the land to the local communities.

As an agri-business decision, I expect this movement to continue and perhaps accelerate.

Foreign farmland deals as a solution for wealthy but food insecure nations may be successful in some regions. Future agricultural production will be stressed by climate change and competition for remaining oil and water supplies while population numbers grow. In more stressful times, expect these land deals to lead to unrest and lay the groundwork for wars and national boundary or ownership changes. Eventually, expect trade agreements of oil for food, too.